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Botswana - Economy (Notes)

ECONOMY Since independence, Botswana has had the fastest growth in per capita income in the world. Economic growth averaged over 9% per year from 1967-97. The government has maintained a sound fiscal policy, despite three consecutive budget deficits in 2002-2004, and a negligible level of foreign debt. Foreign exchange reserves were $5 billion at the end of December 2005, equivalent to 22 months of imports of goods and services. Botswana's impressive economic record has been built on the foundation of wisely using revenue generated from diamond mining to fuel economic development through prudent fiscal policies and a cautious foreign policy. However, economic development spending was cut by 10% in 2002/2003 as a result of recurring budget deficits and rising expenditure on healthcare services. While development spending was budgeted to increase by 12.3% in the 2005/2006 fiscal year, the bulk of the money was to be spent on ongoing projects and maintenance rather than new infrastructure. Real GDP growth was expected to slow in 2005 to between 3% and 4% from its 5.7% growth rate in 2004. The government recognizes that HIV/AIDS will continue to affect the economy and is providing leadership and programs to combat the epidemic, including free anti-retroviral treatment and a nationwide Prevention of Mother-to-Child Transmission program. Mining Two large mining companies, Debswana (formed by the government and South Africa's DeBeers in equal partnership) and Bamangwato Concessions, Ltd. (BCL, also with substantial government equity participation) operate in the country. Since the early 1980s, the country has been the world's largest producer of gem quality diamonds. Four large diamond mines have opened since independence. DeBeers prospectors discovered diamonds in northern Botswana in the late 1960s. The first mine began production at Orapa in 1972, followed by the smaller mines of Lethlakane and Damtshaa. What has become the single-richest diamond mine in the world opened in Jwaneng in 1982. The Orapa 2000 Expansion of the existing Orapa mine was opened in 2000. In December 2004, Debswana negotiated 25-year lease renewals for all four of its mines with the Government of Botswana. The Debswana carat output for 2004 was a record 31 million carats, making Debswana the world's leading diamond producer by value and volume. Exploration for other kimberlite pipes continues. In addition, as part of its drive to diversify and increase local value added within the mining sector, Botswana has announced plans to establish a joint venture company with De Beers, which will be Debswana's sorting and marketing arm. BCL, which operates a copper-nickel mine at Selebi-Phikwe, has had a troubled financial history but remains an important employer. The soda ash operation at Sua Pan, opened in 1991 and supported by substantial government investment, has begun making a profit following significant restructuring. It produced 283,000 tons of soda ash in 2002. BCL is expected to significantly reduce operations within the next ten years. Coal bed methane gas has been discovered in the northeastern part of the country, estimated by the developers at a commercially viable quantity of 12 trillion cubic feet. Development of the gas field, financed by the U.S. Overseas Private Investment Corporation, began in mid-2004. Tourism Tourism is an increasingly important industry in Botswana, accounting for almost 12% of GDP, despite only modest growth of 2.9% in 2003/2004. One of the world's unique ecosystems, the Okavango Delta, is located in Botswana. The country offers excellent game viewing and birding both in the Delta and in the Chobe Game Reserve--home to one of the largest herds of free-ranging elephants in the world. Botswana's Central Kalahari Game Reserve also offers good game viewing and some of the most remote and unspoiled wilderness in southern Africa. Agriculture More than one-half of the population lives in rural areas and is largely dependent on subsistence crop and livestock farming. Agriculture meets only a small portion of food needs and contributes a very small amount to GDP--primarily through beef exports--but it remains a social and cultural touchstone. Cattle raising in particular dominated Botswana's social and economic life before independence. The national herd is estimated between 2 and 3 million head, but the cattle industry is experiencing a protracted decline. Private Sector Development and Foreign Investment Botswana seeks to further diversify its economy away from minerals, which account for a third of GDP (down from nearly half of GDP in the early 1990s). Foreign investment and management are welcomed in Botswana. Botswana abolished foreign exchange controls in 1999, has a low corporate tax rate (15%), and no prohibitions on foreign ownership of companies. The country's inflation rate had remained stable and comparatively low over the 10 years preceding 2005. However, rising fuel and utility prices along with the government's 12.5% devaluation of the Pula in May 2005 resulted in a spike in inflation to an average annual rate of 11.4% as of December 2005, which fell well outside the Bank of Botswana's target rate of between 4-7%. The Government of Botswana was considering additional policies to enhance competitiveness, including a new Foreign Direct Investment Strategy and National Export Development Strategy. Botswana's parliament adopted both a Privatization Master Plan and a new Competition Policy that were aimed at fostering economic diversification. With its proven record of good economic governance, Botswana was ranked as Africa's least corrupt country by Transparency International in 2005, ahead of many European and Asian countries. The World Economic Forum rates Botswana as one of the two most economically competitive nations in Africa. In November 2005, Standard & Poor's once again assigned Botswana an 'A' grade credit rating. This ranks Botswana as by far the best credit risk in Africa and puts it on par or above many countries in central Europe, East Asia, and Latin America. U.S. investment in Botswana remains at relatively low levels. Major U.S. corporations, such as H.J. Heinz and AON Corporation, are present through direct investments, while others, such as Kentucky Fried Chicken and Remax, are present via franchise. The sovereign credit ratings by Moody's and Standard & Poor's clearly indicate that, despite continued challenges such as small market size, landlocked location, and cumbersome bureaucratic processes, Botswana remains one of the best investment opportunities in the developing world. Botswana has a 90-member American Business Council that accepts membership from American-affiliated companies. Because of history and geography, Botswana has long had deep ties to the economy of South Africa. The Southern Africa Customs Union (SACU), comprised of Botswana, Namibia, Lesotho, Swaziland, and South Africa, dates from 1910, and is the world's oldest customs union. Under this arrangement, South Africa has collected levies from customs, sales, and excise duties for all five members, sharing out proceeds based on each country's portion of imports. The exact formula for sharing revenues and the decision-making authority over duties--held exclusively by the Government of South Africa--became increasingly controversial, and the members renegotiated the arrangement in 2001. A new structure has now been formally ratified and a SACU Secretariat has been established in Windhoek, Namibia. Following South Africa's accession to the World Trade Organization (WTO, of which Botswana also is a member), many of the SACU duties are declining, making American products more competitive in Botswana. Currently the SACU countries and the U.S. are negotiating a free trade agreement. Botswana is currently also negotiating a free trade agreement with Mercosur and an Economic Partnership Agreement with the European Union as part of SADC, and opened negotiations with China and India in 2005. Botswana's currency--the Pula--is fully convertible and is valued against a basket of currencies heavily weighted toward the South African Rand. Profits and direct investment can be repatriated without restriction from Botswana. The Botswana Government eliminated all exchange controls in 1999. The Central Bank devalued the Pula by 12.5% in May 2005 in a bid to maintain export competitiveness against the real appreciation of the Pula and restructured the exchange rate mechanism to a crawling peg system to ensure against future large-scale devaluations. Botswana is the immediate past chair of the 14-nation Southern African Development Community (SADC), and Gaborone hosts the SADC Secretariat's headquarters. SADC replaced the Southern Africa Development Coordination Conference (SADCC--launched in 1980, which focused its efforts on freeing regional economic development from dependence on apartheid South Africa. SADC embraced the newly democratic South Africa as a member in 1994. It has a broad mandate to encourage growth, development, and economic integration in Southern Africa. SADC's Trade Protocol, which was launched on September 1, 2000, calls for the elimination of all tariff and non-tariff barriers to trade by 2008 among the 11 signatory countries. Zimbabwe's membership has limited SADC's opportunities for cooperation with the United States. Transportation and Communications A sparsely populated, semi-arid country about the size of Texas, Botswana has nonetheless managed to incorporate much of its interior into the national economy. An 'inner circle' highway connecting all major towns and district capitals is completely paved, and the all-weather Trans-Kalahari Highway connects the country (and, through it, South Africa's commercially dominant Gauteng Province) to Walvis Bay in Namibia. A fiber-optic telecommunications network has been completed in Botswana connecting all major population centers. In November 2003, representatives of Botswana, Namibia and South Africa signed an MOU to simplify documentation to move cargoes to and from the Port of Walvis Bay in Namibia. In addition to the government-owned newspaper and national radio network, there is an active, independent press (one daily and seven weekly newspapers). Two privately owned radio stations began operations in 1999. In 2000, the government-owned Botswana Television (BTV) was launched, which is Botswana's first national television station. GBC is a commercially owned television station that broadcast programs to the Gaborone area only. Foreign publications are sold without restriction in Botswana, and there are 22 commercial Internet service providers. Two cellular phone providers cover most of the country.